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MSP #10: Office Examination

The IRS Does Not Know Whether Its Office Examination Program Increases Voluntary Compliance or Educates the Audited Taxpayers About How to Comply in the Future

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #10-1

Develop measures to track the downstream compliance of audited taxpayers by type of exam.

IRS RESPONSE TO RECOMMENDATION: Due to the large volume of taxpayers we examine in a given year, the monitoring of individual taxpayers’ post-audit behavior would be cost prohibitive.  In addition, we cannot assume a change in a taxpayer’s behavior is a result of an examination.   A taxpayer’s behavior can change from year to year for a variety of reasons, including changes to their employment, business operations, or other environmental factors. We also may not know whether a subsequently-filed return is accurate.  To know for certain whether a return is accurate, or the reason for the behavioral change, would require a follow up examination of the taxpayer. This would be burdensome to the taxpayer and may not represent the most effective use of IRS resources. For this reason, from a cost-benefit perspective, we do not believe this is the best use of limited IRS resources. However, we do analyze closed examination results for use in improving our audit selection process. We will continue to use aggregated examination data to find areas that need further taxpayer education, form or instruction changes, or outreach  events.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is concerned that the IRS did not understand the purpose of this recommendation. While it may be true that a taxpayer’s behavior could change in subsequent years for any number of reasons, it would seem logical that having undergone an exam in one year should have the goal of changing behavior in future years. The National Taxpayer Advocate continues to urge the IRS to develop measures to track the downstream compliance of audited taxpayers to gauge the effectiveness of its audit programs. The National Taxpayer Advocate does not agree that this recommendation was partially adopted.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #10-2

Track results of audits that are appealed by the taxpayer by type of exam.

IRS RESPONSE TO RECOMMENDATION: ​The examination functions and Appeals are unlikely to benefit from tracking or reporting on the aggregate results of appealed cases because the resulting adjustments or outcomes are uniquely drawn from the facts and circumstances of each case. Therefore, tracking the results in the aggregate would not be informative to our processes or our examiners. We do receive Appeals Case Memoranda, which allow us to better understand Appeals’ case resolution on individual cases and can inform our future work by providing examiners feedback on their technical positions.

In addition, we do not support the calculation of dollar-based sustention rates. Appeals’ mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer. A fair and impartial settlement reflects the probable result in the event of litigation or mutual concessions based on the relative strength of the opposing positions where there is substantial uncertainty of the result in the event of litigation, as outlined in Internal Revenue Manual (IRM) 8.6.4.1.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate believes the IRS did not fully understand the purpose of this recommendation. The National Taxpayer Advocate was trying to point out that the IRS should track if a certain type of exam is being appealed more frequently and with success on the part of the taxpayer. Such data could suggest to the IRS that it is not getting the right result at the exam level and allow the IRS to tweak its selection process or better educate examiners to help get to the right result at the exam level.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #10-3

Add educating the taxpayer on future compliance to the quality attributes of an exam for field and office exam.

IRS RESPONSE TO RECOMMENDATION: ​​Office examiners are required to discuss the progress of the examination and proposed issues with the taxpayer or representative at frequent intervals throughout the examination. They are required to follow the IRM, including IRM 4.10.1.3, Communication, and IRM 4.10.7.5, Proposing Adjustments to the Taxpayer and/or Representative. The IRM also directs the examiner to provide  the taxpayer with specific information to properly report their tax in subsequent years.  For example, when applicable, a depreciation schedule or Passive Activity Loss worksheet is provided to the taxpayer to properly compute their tax liability in subsequent years (IRM 4.10.8.14, Issues Requiring Special Reports and Forms). Thus, in the Office Examination program, a high percentage  of the oral and written communication between the taxpayer and the examiner serves to educate the taxpayer on their understanding of the tax law, improve their recordkeeping practices, and promote their future compliance.

The following three quality attributes are used to measure adherence with these requirements:
-Attribute 604, Meet and Deal, measures: Effective communication skills (i.e., listening, responding, and clarifying) to secure the taxpayer’s cooperation during the course of the audit.
–The use of tact to explain findings and conclusions.
–Clear communication of tax law and accounting principles and practices.
–If communication methods are appropriate to the listener and if the examiner listens to and considers the taxpayer’s/representative’s point of view.

– Attribute 617, Taxpayer/Power of Attorney (TP/POA) Rights and Notification, measures if the examiner advised the taxpayer or representative of all rights and kept the taxpayer or representative informed throughout the examination process. This includes ensuring all findings and conclusions reached have been discussed with the taxpayer or representative. The examiner’s responsibilities relating to this quality attribute are found in IRM 4.10.1.2.1, Taxpayer Bill of Rights (TBOR).

– Attribute 719, Report Writing and Tax Computation, measures if the examiner correctly determined or computed the proposed or actual assessment or abatement of tax using applicable report writing procedures. The report must present all the information necessary to ensure clear under- standing of the adjustments and to demonstrate how the tax liability was computed. For most Office Examination reports, examiners include the standard explanations in IRM 4.10.10, Standard Paragraphs and Explanation of Adjustments, to provide plain language adjustment information to the taxpayer and enable the taxpayer to challenge the issue if desired. As an option, more in-depth lead sheets may be attached to the report to explain the issue(s).

These quality attributes measure adherence to the IRM, and therefore, the protection of taxpayer rights.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is pleased that the IRS understands the importance of effective communications in protecting taxpayer rights, however does not agree that this recommendation has been adopted in full. She urges the IRS to explicitly add educating the taxpayer on future compliance to the quality attributes of an exam. While advising the taxpayer of their rights, keeping them informed, and clear communication of tax law and accounting principles and practices all touch on the edges, explicitly measuring whether the examiner has educated the taxpayer on future compliance will ensure it happens.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #10-4

Increase the number of TCOs and put them in more locations throughout the United States.

IRS RESPONSE TO RECOMMENDATION: ​Hiring is based on approval authority and funding. We plan to hire over 200 TCOs in over 80 locations in fiscal year 2019. However, attrition has outpaced hiring efforts and impacts our ability to increase the overall number of TCOs nationwide.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate understands the impact of budget and the effects of attrition on the workforce. The National Taxpayer Advocate urges the IRS to continue to work with Congress to ensure that Congress understands the importance of face-to-face interactions with the IRS, including office exams, and the impact the loss of TCOs has on the ability of the IRS to carry out this function.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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5.

TAS RECOMMENDATION #10-5

Expand the issues covered by office exam, develop pilot programs for office exams for issues such as charitable contributions, and track the customer satisfaction for these pilots versus taxpayers audited via correspondence exam for the same issues.

IRS RESPONSE TO RECOMMENDATION: ​Our Office Examination and Correspondence Examination programs serve very different yet critical functions for compliance. Office Examination works more complex issues that warrant a face-to-face interaction, and Correspondence Examination works single-issue cases that can easily be resolved through documentation. The issues currently covered by both TCOs in Office Examination and Tax Examiners in Correspondence Examination are selected appropriately according to their position descriptions and grade levels.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is disappointed that the IRS will not consider at least attempting a pilot on any issue to see if the IRS or the taxpayer receive better results via a different type of examination. Given the disparity of default rates between types of exam, it seems clear that while the IRS deems certain issues easy to resolve through documentation, these issues are often not being resolved with any participation on the part of the taxpayer.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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